Redwood Trust exercises its option to buy the rest of 5 Arches

Redwood Trust has exercised its option to expand its minority stake in 5 Arches to 100%, increasing Redwood's exposure to loans used for house flipping and other types of residential investment.

Redwood will use a mixture of cash and stock to pay $40 million for the remaining 80% stake in 5 Arches over time. Part of the consideration is contingent on 5 Arches' ability to produce enough origination volume over the next two years.

The real estate investment trust paid $10 million in cash to purchase a 20% stake in 5 Arches last May. The acquired company makes and manages single-family rental loans and multifamily bridge loans as well as "fix and flip" loans, and its origination volume has grown dramatically in recent years.

In 2015, 5 Arches' annual production totaled just $150 million. Last year, it was $850 million.

Redwood CEO Christopher Abate had signaled interest in deepening the company's involvement in the market for residential investor loans during its third-quarter earnings call last year.

"Overall, we continue to observe a deep addressable market in the single-family rental sector," Abate said during the call.

The Federal Housing Finance Agency's decision to discontinue Fannie Mae and Freddie Mac's tests of expanded involvement could potentially expand opportunities for private-sector involvement in SFR, the Redwood CEO noted.

"It is uncertain if and when the FHFA will reconsider a role for the GSEs in this asset class," he said. "We view this development positively as it relates to Redwood's strategic positioning in single-family rental."

Redwood plans to release its 4Q18 earnings at the end of February.